PENDULUM SWINGS IN EMPLOYEES’ FAVOUR AGAIN

Mon, 2011-10-10 22:05 — Robert Smithson

One of the areas of employment law which remains least predictable is the enforceability of post-employment restrictive covenants. A recent decision of the Alberta Court of Appeal represents another pendulum swing in favour of employees’ interests.

The element in question is whether a restrictive covenant can be enforceable after the employee has been wrongfully dismissed by the employer. This question attracts periodic attention and my thinking is that even most employment lawyers and judges aren’t certain of the answer.

The issue arises out of the general law of contract but must be answered in the specific context of employment contracts.

All employees have an employment contract, whether they know it or not and regardless of whether the terms have been put in writing. One of the terms of those contracts is the employer’s obligation to provide working notice of termination (or the equivalent pay in lieu thereof).

This obligation may not have been put in writing, in which case the common law of employment imposes the obligation to provide “reasonable” working notice. A written contract may, on the other hand, contain a term which expressly defines the employees’ working notice entitlement.

Either way, the employer’s failure to comply with its contractual obligation to provide working notice (or pay in lieu) is what is referred to as a “wrongful dismissal”. It is a fundamental breach of the contractual terms of employment and brings the employment relationship to an end.

When employers have imposed restrictive covenants (such as for non-competition or non-solicitation of clients) on an employee, those restrictions are intended to apply for a period of time after the cessation of the employment relationship. So, what happens to the covenants when the employer wrongfully dismisses the employee and, thereby, breaches the contract?

Some lawyers and judges feel that the employer’s breach of the contract doesn’t undermine the enforceability of the covenants – even though he or she has been wrongfully dismissed, the post-employment covenants still apply. Others would say that the employer’s breach of the contract means the employee should not be bound by the covenants.

The Alberta Court of Appeal has thrown its weight (albeit in a divided sense) between the latter view. In a case involving a foreign exchange trader, MacLean, who was fired by Globex Foreign Exchange Corporation, the Court split on this question but sided with the employee.

MacLean had agreed to a restrictive covenant when he was hired in 2003. Two years later, he was fired. He went to work for a competitor of Globex after the termination.

Globex sued MacLean to enforce the non-solicitation and non-competition clauses in his employment contract. The Court rejected the action, in part because Globex had wrongfully dismissed him and, as such, could not continue to rely on the employment contract.

The Court found that (even in a case such as this in which the covenants seemed to contemplate the possibility of a wrongful dismissal) the former employee is relieved from the obligation to comply with the covenant. The Court stated that an “employer that wrongfully terminates a contract of employment should not be able to capitalize on its failure to give notice or damages in lieu of notice by enforcing prospective obligations” against the former employee.

It went on to state that there “are valid reasons for excusing a wrongfully dismissed employee from compliance with restrictive covenants. [T]o hold otherwise would reward employers for mistreating their employees.”

So, in Alberta at least, employees who wish to escape the impact of onerous restrictive covenants can always hope to be wrongfully dismissed. It seems likely the Supreme Court of Canada will be asked to weigh in on this topic in the not-too-distant future.

Robert Smithson is a labour and employment lawyer, and operates Smithson Employment Law in Kelowna. For more information about his practice, or to subscribe to You Work Here, visit www.smithsonlaw.ca[1]. This subject matter is provided for general informational purposes only and is not intended as legal advice.

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